(Money Magazine) -- Some of the best strategies for managing money are based on principles that have stood the test of time: Save consistently, diversify, keep your costs down, turn off the TV touts. But that doesn't mean you never have to adjust your thinking in response to a single major event or a fast-growing trend.
The investing landscape today is in the midst of dramatic shifts, whether it's the return of stomach-churning volatility in financial markets following the credit crisis, or the increasing lengths of your and your spouse's retirements, or the fact that the United States is no longer the only engine of growth capable of driving the world's economy.
Says Alice Lowenstein, a research specialist for the asset manager Litman/Gregory: "The building blocks may be the same, but the past few years have brought some changes to the way we plan." To make the most of this new world, start here.
... Because your investments must reflect a radically changed economy.
The new world: Investing mostly in the U.S. seemed wise not so long ago, when the American economy drove global growth and the best companies in the world were largely found here. Now that economies and markets abroad are growing at a much faster clip, feasting on home cooking "doesn't make sense anymore," says Morningstar's Russel Kinnel.
What to do:
Boost your holdings in foreign shares to half your stock portfolio, since overseas equities make up more than 50% of the MSCI Barra All-Country World Index. Currently the typical U.S. investor has less than 15% of his equity holdings in international stocks.
2. Foreign stocks.
Keep about a quarter of your international-equity portfolio in shares of companies based in emerging economies such as China, India, and Latin America. After all, emerging-market equities now make up around 25% of the global stock market.
Invest as much as a third of your fixed-income portfolio overseas, to add diversification and foreign-currency exposure, says Peter Miralles of Atlanta Wealth Consultants.
... Because there's a good chance you could live to 100. Really.
The new world: Retirement is only getting longer. In 1990, a 65-year-old man could expect to live to 80. By 2030, the average will jump to 83. So if you're 45 now, you could live for a while. "I tell my clients what ought to keep them awake at night isn't dying -- it's not dying," says planner Harold Evensky.
What to do:
1. Expect retirement to last 30 to 35 years.
The traditional advice of 25 to 30 years is no longer sufficient, since there's a good chance you'll make it into your nineties -- and maybe even to 100.
2. Create your own guaranteed pension.
At retirement, use up to half your nest egg to purchase an immediate fixed annuity. In exchange for a lump sum, these insurance products guarantee you monthly checks for life.
3. Reduce withdrawals from your 401(k) and IRA accounts.
Conventional wisdom says you can safely pull out 4% of your nest egg annually, adjusting for inflation. But that's assuming a 25- to 30-year retirement. If your retirement lasts longer, you'll stand a better chance of having your money outlive you by lowering your withdrawal rate to just below 4%. An immediate annuity can help you do that while still producing decent retirement income.
... Because financial markets will be more volatile and less rewarding.
The new world: Don't bank on earning the long-term annual gain of 10% for stocks anymore. Economists are bracing for slow growth, and the tail winds of falling rates and low inflation are likely to reverse course. Plus, after last year's rally, stocks are trading at lofty levels again relative to earnings, says GMO's Jeremy Grantham. "So do not be conned into believing that every bad decade is followed by a good one."
What to do:
1. Ratchet down your expectations.
In the '80s and '90s, planning for a 7% annual return was considered conservative. But based on current market conditions, it's safer to expect 6.5% from stocks and 4% from bonds. That means a 70% stock/30% bond portfolio is likely to deliver only around 5.75% a year.
2. Don't ratchet up your risk.
"This is not a time to be heroic," says Rob Arnott of Research Affiliates. So don't try to make up for modest returns by jacking up your allocation to stocks.
3. Plan to save more.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.12%||4.00%|
|15 yr fixed||3.14%||3.00%|
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|15 yr refi||3.21%||3.09%|
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